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Valuation Analysis and Structured
Management Buy-Out of SolarTech Inc.

City University of Seattle: MBA FIN 541
Outline
 Market & Financial Analysis
 Pro Forma Financial Plan
 Financing Proportions (Debt/ Equity Mix)
 Proposed Financing Structure
 Recommendation
Market & Financial Analysis - Profitability
Hist.

Hist.

Hist.

Hist.

Hist.

2010

2011

2012

2010

2011

2012

net sales

31,0

32,0

34,0

growht rate



Hist.

n/a

3,23%

6,25%

2,1
n/a

2
-4.76%

2
25.00%

net income
growth rate

Solartech Inc. demonstrates stable increase in net sales for the last two years by reaching the
level of $34.0 million for 2012;



Comparing the Net sales in 2012 to those in previous years, the Net Income in 2012 indicated an
increase.
Market & Financial Analysis – Key Ratios
Hist.
2012

Equity ratio
Debt retirement ratio
Operating cash flow margin
Return on assets (ROA)
Operating profit margin

20,4%
7,5
21,2%
-30,0%
19,1%

Hist.
2011

20,0%
6,6
18,4%
-25,6%
16,3%

Hist.
2010

20,8%
6,7
19,7%
-27,4%
17,4%

Rating

good
average
very good
danger



A good equity ratio that guarantees more free cash for future growth;



Each dollar of sales Solartech Inc. makes 19 cents before interest and taxes;



Negative ROA – Solartech Inc. invests a high amount of capital in

production, while receiving a little income.
Market & Financial Analysis:
Comparison with industry

Solartech Inc. operates in Renewable Energy Services & Equipment Industry;
Solartech Inc. has average if not marginally better ratios than its rivals;
The industry appears to be in infancy/ is made up of underachievers.
Market & Financial Analysis – Industry Forecast

(Altenergymag. 2013)

The solar PV capacity is expected to continue to grow in the future – growing
market;
The substantial fall in solar PV cost suggests fall in prices of Solartech Inc.’s
products and put under condition the current price of its inventory;
The global cumulative installed capacity for solar PV is expected to reach 330,424
MW by 2020, growing at a CAGR of 23.7% during 2011-2020.
Market & Financial Analysis
Debt leverage and coverage ratios
Financial Covenants:
Net Debt/Equity
Net debt/EBITDA
EBITDA/Interest expense
FCF/(Interest + Principal)

1,2
0,8
10,3
3,1

1,3
0,9
9,8
2,4



Net Debt/ Equity: Moderate/ Some Headroom;



Net Debt/ EBITA: Low/ Headroom;



EBITDA/Interest Expense: High/ No Headroom;



1,2
0,9
10,2

Min./Max. Values
max. 2.0
max. 3.5
min. 3.0
min. 1.0

FCF: High/ No Headroom.

The set up financial covenants and Solatech's ratios show that the company is
in compliance with covenants.
Pro Forma Financial Plan


The Free Cash Flow is designed to measure a company’s financial
performance by calculating the firm’s operating cash flow from its
capital expenditures.
Financing Proportions – Debt/Equity Mix

Debt/ Equity Mix is a balance between funds
available, what the returns and covenants dictate, and
the financial structure can support.
Scenario 1 - an ideal mix of 60% Debt, 40% Equity
Scenario 2 – a mix of 15% Debt, 85% Equity.
Management Buy-Out
This transaction is when an equity interest in the business is
acquired by its management (with the cooperation of outside
finance).
Financing Sources
Management buyouts - too risky for banks to finance
through a loan in itself;

They typically finance at 4x cash flow;
Financing structure for Solartech Inc. - partially leveraged
through private equity financing (co-investor);

Co-investor exits the business within 5 years while
minimizing the risk.
Valuation
For the financing structure, we will utilize the DCF value for
Solartech Inc.
Scenario 1

Scenario 2

Financial Structure
Evaluation
Investors
hedge
their
investment bets based on
a balance of return.
Scenario 1 is presented as
a baseline or ideal to
contrast Scenario 2.
−a roughly 60% Debt/ 40%
Equity split;
−it would provide an IRR
of 15% in year 2016;
−more debt heavy then
equity (compared to
Scenario 2);
−comes closer to the
ceilings of the financial
covenants.
Evaluation, Cont.
Scenario 2
-never hits an IRR
of
15%,
the
minimum desired
by an investor in
the 5-year period;
- high
equity
investment;
-adequate
headroom
on
each
covenant,
with
the exception of
IRR.
Mezzanine Finance?
Use of mezzanine finance
could be considered in
scenario 1 or scenario 2, if:
- purchase price
exceeded the amount
that could be financed
using a loan/debt.
Mezzanine capital treated
as equity, but is essentially
debt;
Has a higher service fee
or cost than a traditional
loan;
The IRR is significantly
impacted due to the cost
of this capital –but the
return preference is not
there for a co-investor.

Evaluation Cont.
Recommendation
SolarTech Inc. appears to be a good candidate for a
management buyout.
Take in mind:
Part of a growing, but immature industry segment with
growing sales and good cash flow management;

Concern over a lackluster ROA => poorly utilized capital
internally.

Proposal:
The deal structure - a 60% Debt/ 40% Equity balance - best
meets parameters such as Covenants and IRR.
Valuation Analysis and Structured Management Buy-Out of SolarTech Inc.
References
Altenergymag, (2012). Solar Photovoltaic (PV) Power - Global Market Size and Key Country
Analysis to 2020. Retrieved on June 21, 2013 from:
http://www.altenergymag.com/emagazine/2012/02/solar-photovoltaic-pv-power--globalmarket-size-and-key-country-analysis-to-2020/1849
CSImarket, (2013). Renewable Energy Services & Equipment Industry. Retrieved on June
21, 2013 from: http://csimarket.com/Industry/Industry_Profitability.php?ind=605
Deloite (2004). Making The Break: A Practical Guide to MBO. Retrieved June 21, 2013 from:
http://www.deloitte.com/assets/DcomUnitedKingdom/Local%20Assets/Documents/Guide%20to%20mbos.pdf
Eayers, Willis E., Mergers & Acquisitions: A Corporate Finance Perspective, 2013 Class
Presentation
International Energy Agency, (2012). World Energy Outlook 2012. Retrieved on June
21, 2013 from
http://www.worldenergyoutlook.org/media/weowebsite/2012/WEO2012_Renewables.pdf
Investopedia (2013). Debt/Equity Ratio. Retrieved June 21, 2013 from
http://www.investopedia.com/terms/d/debtequityratio.asp
TrcSolutions, (2013). Outlook bright for Future of Solar Energy. Retrieved on June 21, 2013
from: http://blog.trcsolutions.com/solar-energy/

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Valuation Analysis and Structured Management Buy-Out of SolarTech Inc.

  • 1. Valuation Analysis and Structured Management Buy-Out of SolarTech Inc. City University of Seattle: MBA FIN 541
  • 2. Outline  Market & Financial Analysis  Pro Forma Financial Plan  Financing Proportions (Debt/ Equity Mix)  Proposed Financing Structure  Recommendation
  • 3. Market & Financial Analysis - Profitability Hist. Hist. Hist. Hist. Hist. 2010 2011 2012 2010 2011 2012 net sales 31,0 32,0 34,0 growht rate  Hist. n/a 3,23% 6,25% 2,1 n/a 2 -4.76% 2 25.00% net income growth rate Solartech Inc. demonstrates stable increase in net sales for the last two years by reaching the level of $34.0 million for 2012;  Comparing the Net sales in 2012 to those in previous years, the Net Income in 2012 indicated an increase.
  • 4. Market & Financial Analysis – Key Ratios Hist. 2012 Equity ratio Debt retirement ratio Operating cash flow margin Return on assets (ROA) Operating profit margin 20,4% 7,5 21,2% -30,0% 19,1% Hist. 2011 20,0% 6,6 18,4% -25,6% 16,3% Hist. 2010 20,8% 6,7 19,7% -27,4% 17,4% Rating good average very good danger  A good equity ratio that guarantees more free cash for future growth;  Each dollar of sales Solartech Inc. makes 19 cents before interest and taxes;  Negative ROA – Solartech Inc. invests a high amount of capital in production, while receiving a little income.
  • 5. Market & Financial Analysis: Comparison with industry Solartech Inc. operates in Renewable Energy Services & Equipment Industry; Solartech Inc. has average if not marginally better ratios than its rivals; The industry appears to be in infancy/ is made up of underachievers.
  • 6. Market & Financial Analysis – Industry Forecast (Altenergymag. 2013) The solar PV capacity is expected to continue to grow in the future – growing market; The substantial fall in solar PV cost suggests fall in prices of Solartech Inc.’s products and put under condition the current price of its inventory; The global cumulative installed capacity for solar PV is expected to reach 330,424 MW by 2020, growing at a CAGR of 23.7% during 2011-2020.
  • 7. Market & Financial Analysis Debt leverage and coverage ratios Financial Covenants: Net Debt/Equity Net debt/EBITDA EBITDA/Interest expense FCF/(Interest + Principal) 1,2 0,8 10,3 3,1 1,3 0,9 9,8 2,4  Net Debt/ Equity: Moderate/ Some Headroom;  Net Debt/ EBITA: Low/ Headroom;  EBITDA/Interest Expense: High/ No Headroom;  1,2 0,9 10,2 Min./Max. Values max. 2.0 max. 3.5 min. 3.0 min. 1.0 FCF: High/ No Headroom. The set up financial covenants and Solatech's ratios show that the company is in compliance with covenants.
  • 8. Pro Forma Financial Plan  The Free Cash Flow is designed to measure a company’s financial performance by calculating the firm’s operating cash flow from its capital expenditures.
  • 9. Financing Proportions – Debt/Equity Mix Debt/ Equity Mix is a balance between funds available, what the returns and covenants dictate, and the financial structure can support. Scenario 1 - an ideal mix of 60% Debt, 40% Equity Scenario 2 – a mix of 15% Debt, 85% Equity.
  • 10. Management Buy-Out This transaction is when an equity interest in the business is acquired by its management (with the cooperation of outside finance).
  • 11. Financing Sources Management buyouts - too risky for banks to finance through a loan in itself; They typically finance at 4x cash flow; Financing structure for Solartech Inc. - partially leveraged through private equity financing (co-investor); Co-investor exits the business within 5 years while minimizing the risk.
  • 12. Valuation For the financing structure, we will utilize the DCF value for Solartech Inc.
  • 14. Evaluation Investors hedge their investment bets based on a balance of return. Scenario 1 is presented as a baseline or ideal to contrast Scenario 2. −a roughly 60% Debt/ 40% Equity split; −it would provide an IRR of 15% in year 2016; −more debt heavy then equity (compared to Scenario 2); −comes closer to the ceilings of the financial covenants.
  • 15. Evaluation, Cont. Scenario 2 -never hits an IRR of 15%, the minimum desired by an investor in the 5-year period; - high equity investment; -adequate headroom on each covenant, with the exception of IRR.
  • 16. Mezzanine Finance? Use of mezzanine finance could be considered in scenario 1 or scenario 2, if: - purchase price exceeded the amount that could be financed using a loan/debt. Mezzanine capital treated as equity, but is essentially debt; Has a higher service fee or cost than a traditional loan; The IRR is significantly impacted due to the cost of this capital –but the return preference is not there for a co-investor. Evaluation Cont.
  • 17. Recommendation SolarTech Inc. appears to be a good candidate for a management buyout. Take in mind: Part of a growing, but immature industry segment with growing sales and good cash flow management; Concern over a lackluster ROA => poorly utilized capital internally. Proposal: The deal structure - a 60% Debt/ 40% Equity balance - best meets parameters such as Covenants and IRR.
  • 19. References Altenergymag, (2012). Solar Photovoltaic (PV) Power - Global Market Size and Key Country Analysis to 2020. Retrieved on June 21, 2013 from: http://www.altenergymag.com/emagazine/2012/02/solar-photovoltaic-pv-power--globalmarket-size-and-key-country-analysis-to-2020/1849 CSImarket, (2013). Renewable Energy Services & Equipment Industry. Retrieved on June 21, 2013 from: http://csimarket.com/Industry/Industry_Profitability.php?ind=605 Deloite (2004). Making The Break: A Practical Guide to MBO. Retrieved June 21, 2013 from: http://www.deloitte.com/assets/DcomUnitedKingdom/Local%20Assets/Documents/Guide%20to%20mbos.pdf Eayers, Willis E., Mergers & Acquisitions: A Corporate Finance Perspective, 2013 Class Presentation International Energy Agency, (2012). World Energy Outlook 2012. Retrieved on June 21, 2013 from http://www.worldenergyoutlook.org/media/weowebsite/2012/WEO2012_Renewables.pdf Investopedia (2013). Debt/Equity Ratio. Retrieved June 21, 2013 from http://www.investopedia.com/terms/d/debtequityratio.asp TrcSolutions, (2013). Outlook bright for Future of Solar Energy. Retrieved on June 21, 2013 from: http://blog.trcsolutions.com/solar-energy/